Counterparty Risk

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MODELING CORPORATE
RISK AT FORD
Freeman Wood
Director
Global Risk Management
WHAT IS CORPORATE RISK
MANAGEMENT
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Risk exists in everything we do as a company -- why is it
important to understand and manage it? What’s the value?
Risk management is about understanding the implications of
our operating environment and the decisions we make.
It is also about exploring different ways to reduce uncertainty
and maximize returns relative to risk => Capital Allocation
It starts with those closest to the risks: Business Units
Successful risk management is a collaborative effort between
risk experts and our business partners – together we make
better decisions
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RISK MANAGEMENT EVOLUTION
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Began with large financial institutions
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Naturally focused on financial risks and capital management
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Investment banks are in the business of taking risk
Market risk  Credit Risk  Operational Risk  Enterprise-wide
Impact of changes in MTM and on the balance sheet and income statement
Short horizon / holding period
Corporate Risk Management: Risk mitigation / transfer
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Began with hedging of financial risk /cash flow (FX flow, NII) and hazard
risk (property/casualty)
Income statement focus, less focus on capital/equity management
Longer horizon
Unique risk profile
Integrated risk assessment including:
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Financial, business, insurance, regulatory & operations risk
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WHY IS INTEGRATED RISK
MANAGEMENT IMPORTANT?
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In The Past:
 The corporate focus has been on profits
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Now:
 Corporations are now focused on maximizing shareholder
value. So how is this done?
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Future:
 Reduce income volatility: the probability of financial
difficulty is reduced, funding is less costly
 Ensure liquidity
 Capital efficiency: Risk adjusted capital allocation and riskadjusted return assessment: Optimize profits relative to risk
 Maximize shareholder value added
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WHERE DOES PROPER RISK
MANAGEMENT BEGIN?
Where do you start and what are the key drivers
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A Culture of Risk Understanding Must be Established
Senior Management and Business Support
How is this done: Establish objectives, what do you
want to achieve and how will it add value
 Comprehensive identification of risks across functions
 Develop a integrated structure and complete coverage
 Better understanding of returns relative to risks
 How will value be added to the company
 Continue to question and improve risk evaluation
methodologies
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RISK MANAGEMENT PROCESS
THE EVOLUTION OF SOUND RISK MANAGEMENT
Corporate
Culture
Identification Measurement Management Performance
Measurement
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FORD RISK MANAGEMENT
PURPOSE STATEMENT AND VISION
To improve the business’ ability to understand,
manage, and mitigate global corporate risk in
real time,
In such a way that we make better risk/return
decisions and manage capital more efficiently,
So that shareholder value materializes and
unforeseen risks do not.
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Evolution of Ford Risk Management
Scope and Risk Identification
Overall Business Risk
Operations Risk
Financial Analysis/
Risk Assessment
Financial
Risk
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RISK MANAGEMENT PROCESS
THE EVOLUTION OF SOUND RISK MANAGEMENT
Corporate
Culture
Identification Measurement Management Performance
Measurement
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MEASUREMENT AND MANAGEMENT:
WHERE TO BEGIN?
Break Down the Barriers
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Mentally
 See the broad picture: Not by individual business units
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Recognize the links and common exposures across the organization
Organizational
 Get all the people who think about and manage risk together to
capitalize on synergies: Financial and hazard risk managers
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Systems and Technology
 Data integration and management is critical
 Strong analytics that span risk factors and functions
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Use multiple risk assessment methods/tools
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CURRENT APPROACH
 FX and Commodities
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Strong ability to identify current and future transaction risk
Exposures centrally aggregated and risk managed in one location
Risks reported in terms of positions (e.g. net currency positions), risk to
individual currency movements (scenarios based on historic and
estimated future volatility), and VaR for FX (since 1997)
Earnings at Risk (EaR)
 Interest Rate Risk
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Highly quantitative assessment of asset / liability risk including hedging
products
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Net Interest Income (EaR) and Duration of Equity
Cash portfolio management and IR and FX trading co-located
Duration and VaR for cash portfolio
Analysis of diversification benefits of combined FX and interest rate
portfolio as well as VaR weakness
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CURRENT APPROACH
 Counterparty Risk
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New approach to assessing current (MTM) and future (potential) risk
Web-based integrated assessment of risk across business units
Revised limits approach
System allows for assessing the impact of hedging actions on
counterparty risk and overall liquidity: Trading market risk for
counterparty risk
 Hazard / Catastrophic Risk
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Global corporate insurance programs: Property, Casualty, D&O, etc.
Captive insurance entity
Retention analysis
Claims interface with Legal, Insurers, and Business Operations
Insurance products to manage financial risks
Understanding business interruption risk leads to a broader
understanding of Operational Risk
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FUTURE APPROACH
What do we intend to build?
 Global, integrated risk management process that assesses
interest rate, FX, commodity, liquidity, and
counterparty/issuer risks within a unified structure and
technology platform
 The risk assessment process will integrate corporate
insurance and the inter-relation of financial market risk with
operational risk to provide a complete picture of total
enterprise exposure.
 Use of capital markets and insurance markets solutions to
mitigate/transfer specific risks and better understand our
global risk profile
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BRIDGING THE GAP
What are some of the specific steps we intend
to take to integrate risks?
 Counterparty risk system: Basis for a broader technology
platform
 Integration of specific market risks: Interest Rate risk
 Retention analysis: Building a framework for
determining our tolerance for hazard risk as well as other
types of risks
 Begin to explore cross-market products/solutions for
hazard and financial risk mitigation
 Partner with ERM service providers?
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BENEFITS OF BETTER RISK MANAGEMENT
 Better internal understanding of risk
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Provide more comprehensive information to strategic business units
allowing for better understanding of risk and better allocation of capital
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More comprehensive understanding of risk and return implications of
decisions made by the individual business units.
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Provide more timely, comprehensive and integrated view of global
exposures across business units to senior management
Better understanding of operating risks and the coverage of that risk
through insurance products
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 Added value to shareholders
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Better understanding and management of risk will reduce income volatility
and better protect equity value
Less income volatility will lead to cheaper cost of funds
More efficient allocation of equity capital to higher return, lower risk areas
Better understanding of natural hedges and off-sets within the company
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